Instimatch - FX morning commentary - 31/3/25

Good morning

Given the significant amount of important key economic data from US and Europe as well as the announcement of more tariffs from Trump, then we are in for another volatile week in the global markets, where the risk for bond yields/interest rates are skewed to the downside. In the meantime, the Atlanta Fed’s GDPNow estimate showed Q1 GDP shrinking by 2.8% vs the previous release’s estimate of -1.5%. GDPNow isn't the Atlanta Fed's official forecast; instead, it's a reading that reflects economic data so far this quarter. Fears of a U.S. recession also remain in play, with a leading US investment bank now forecasting a 35% chance of an economic slowdown in the next 12 months. 

Trump said he’ll start his reciprocal tariffs with all countries (20% across the board?!) instead of a focus on the “dirty 15” which are responsible for the lion’s share of the US goods trade deficit as suggested earlier by Secretary of Treasury Bessent. Details on what specific sectors, calculations or (ways to get) exemptions are still unknown. Adding to the risk-off climate is an escalation in ceasefire talks between Russia and the US with Trump threatening secondary tariffs on buyers of Russian oil and more and more talk about plans to bypass the constitution prohibition on US presidents being elected three times. This week’s tariff narrative by far outweighs other economic data like today’s EMU March CPI figures (expected to strengthen the case for a final April ECB rate cut) or key US eco data (ISM surveys, JOLTS job openings, ADP employment and payrolls).

US Treasuries ended last week on a strong note as PCE data, University of Michigan and Trump's tariff threats in combination sent markets into stagnation mode. US equities dropped sharply with tech leading the selloff while gold prices set fresh record highs above $3,100. Within FX JPY outperformed vs G10 peers given the increasing expectations for a recession in the US economy on the back of the potential trade war as well as ongoing fiscal tightening in the US.

Unlike US Treasuries, the US dollar failed to even briefly profit from the risk-off climate given the rising US recession risk premium. Fears of global de-dollarisation become more and more of an issue as well. The dollar index fell about 0.2% in Asian trade to 103.85. 

EUR/USD closed back above the 1.08 mark and holding steady at the European open around $1.0850.

GBP was off to a good start to Friday's session as UK retail sales remained surprisingly strong in February. Retail sales excl. auto fuels rose 1.0% m/m (cons: -0.5%, prior: 1.6%) and 2.2% y/y (cons: 0.4%, prior: 0.8%). While consumer confidence remains muted the data increasingly points to consumers real wage gains feeding through to the spending picture. The increase in the minimum wage in April should also help in this regard. While good news on the domestic front supported GBP initially, EUR/GBP ended the day higher on the back of weaker equities and US growth concerns. This highlights the importance of the global backdrop for the cross. Traders continue to target a move lower in EUR/GBP.

USD/JPY fell 0.5% overnight to a low of 148.73 with the JPY once again buoyed by safe haven demand.  The yen was also supported by further hawkish signals from BOJ officials, coupled with strong inflation readings in the past two weeks, both cemented expectations for more rate hikes this year.

Friday’s themes are at play this morning. Asian stock markets fell by up to 3-4% (Japan, Taiwan) with European and US futures also pointing to steep losses.  Broader Asian currencies moved little, with market holidays across South and Southeast Asia, for Eid, kept trading volumes muted. 

China's official manufacturing purchasing managers’ index (PMI) rose to 50.5 in March from 50.2 in February, reaching a 12-month high. The manufacturing PMI has remained in expansion territory for five of the past six months. The data doesn’t suggest tariffs have had a significant impact on new orders so far. It could be argued, though, that importers are still front-loading orders out of fear April could bring another round of tariffs. The non-manufacturing PMI also saw a respectable uptick in March, rising to 50.8 from 50.2. The non-manufacturing PMI has remained at 50 or above since the start of 2023.  USD/CNY eased 0.1% to 7.2528

AUD/USD eased 0.2% to $0.6284 before the conclusion of the RBA meeting on Tuesday, where the central bank is widely expected to keep rates unchanged. But the RBA could offer a less hawkish outlook amid some cooling in the Australian economy. 

USD/KRW pair rose 0.1% to 1,471.24 even as industrial production data for February read stronger than expected.